Diamond Estates Wines & Spirits Inc. (DWS) Earnings Call Transcript & Summary

I can hang up and try just to figure out what dial -- number to call into. That's my challenge.

Is there conferencing...

Usually -- I think usually, there's like a code you press that we have normally like a star or something, Andrew, no?

Yes. I'll try that. So I'll hang up and try because there should be an operator function.

Yes. Thank you, Andrew. We'll take a few minutes anyway to get Murray's -- everybody get the presentation up.

Yes. It's going to be difficult for Murray with that in the background.

Yes. So Murray, are you...

I'm here. I'm looking at the [indiscernible] right now, what can be done to limit the noise on the line. Okay.

So my question for you is, okay, for everybody's sake. I'm on the Diamond Estates' website, on the Investors Overview.

Yes. And [indiscernible] one.

And then the next...

Lot of people [indiscernible]...

Just so everybody knows what you click on.

[indiscernible]

I don't know if you heard me, Murray, but for everybody on the call, if you're not 100% sure, you click on the Annual General Meeting on the right side once you get to the Investor Relations and then the 2020 AGM presentation.

Yes. You might make it clear that Investor Relations is under the heading Diamond Estates.

Yes. Yes, that's it. Yes. Originally, we did that. So Diamond Estates on the top navigation, and then Investor Relations under that, and then there's a 2020 AGM presentation. Okay. Murray, you there?

Okay, everyone. Yes, I'm here. And we are going to be able to mute the lines. I now have the command to do that. So we're muting everybody's line. I'm going to turn it back on at the end of my presentation. So we'll begin the presentation now. Thank you, everybody, for joining us. So welcome, everyone. It's obviously a very eventful year that we've been on. And today's presentation will deal with, obviously, with fiscal 2020, which was concluded on March 31, 2020. We also have, as part of our presentation, our first quarter results which were announced back in August -- sorry July. And I would just caution everybody to read the legal terminology at the front of the presentation, which is on our website with regards to both the notice and also risk factors involved in our presentation. So to begin, obviously, 2020, there were some significant highlights for the business. We continue to see some success, very solid success in the grocery channel in Ontario. We saw significant commercial strides for our Backyard Vineyard in BC, and we continue to see those through the first quarter of the year, even despite the pandemic. We received major endorsements from a couple of our major suppliers being the Deutsch Family Wine, which is the Josh brand. We extended our business relationship with them for another 3 years as well as we assumed new business from Heineken. We saw very positive results through our own retail outlets, which you'll see as we go through the presentation, and we made significant inroads in the on-premise business particularly on the Ontario market. You'll see that we've added a number of national and regional rooftops to our business. And we did see some significant strength in our extra-provincial as we've been growing our -- from just an Ontario-based domestic producer and BC-based domestic producer into other regions of the country. However, with those highlights, of course, there was one area of significant concern to us, which is a continued challenge of the export environment. And we'll have some comments on that later on in the presentation. Going the financial review. Revenue for the year was down 4.7%, largely on the back of our export revenue to -- mainly to China. However, we did see our gross margins improve as a percent, and all those achieved year ago gross margins. And EBITDA, although down, we've actually -- when you look at our adjusted basis, it's virtually the same a year ago. Earnings per share were down about $0.02 per share, and our cash flow from operations was down a little bit versus a year ago. And much of this is really we're stabilizing the business. And what we're into now, as you'll see, we're seeing significant opportunities will start to emerge as we go through the pandemic. The balance sheet, we had 2 very large contributions to equity over the past year. And through fiscal 2020, about $8.2 million. Our assets, our combined assets are close to $50 million now with $29.5 million of total liabilities, and our shareholder equity in around $20.4 million. There have been some pressures on our short-term balance sheet from the losses, but it's been offset with our shareholder equity and the continued support we've been receiving from our shareholders. Turning our attention to Q1. While we did see revenues down rather significantly as a result of the early stages of the COVID pandemic in April and into May where we saw a total decline of 18.5% of revenue. Gross margins did hold in on a percentage basis, but we did see some melt in the total amount, down about 17.9%. However, on an adjusted EBITDA basis, as we -- as the quarter unfolded, we were able to significantly reduce our SG&A, which allowed us to claw back or recoup how much of that lost gross margin. And our EBITDA actually improved on the quarter by about $200,000 year-over-year, and on adjusted EBITDA basis, about $100,000. Our net income -- the losses have in our earnings per share, although negligible, are still negative, but we did have positive cash flow from operations. So considering what we were facing in terms of the pandemic and a lot of the challenges that the industry has faced, we thought that this was excellent results given the circumstances. Turning next to some of the successes we had through the year. Obviously, Ontario grocery continues to be a major footprint in our business. We remain the #2 supplier for VQA into the market with about just under 12% market, which is fairly significant. That's about 2.5x to 3x what we have in the LCBO. And 3 of the top 7 brands continue to be our domestic Diamond Estates brands. As well, of course, we represent a number of agency brands. And the -- we are the #4 supplier in the grocery, which is fairly significant. We are 1 of the top 10, obviously, agencies in the country, but being #4 supplier to groceries -- punching above our weight. We have about 7.1% share of market. We have good distribution across a number of brands in the grocery market. You see a couple of pictures there just about brands in grocery stores, wind rack stores in Orangeville and the Fortinos 80 Vaughan Terri. We do have, as we've said many times in the past, a very solid and expanding portfolio. We have a number of brands at various price points, and we continue to expand our brand portfolio and our [ variables ] on our domestic business. And I've seen some success, particularly with 20 Bees in the value segment and Serenity in the higher value segment of LCBO grocer. We did have a very strong year, turning our attention to our own retail. Right up until the pandemic struck in mid-March, even though we lost kind of the last 3 weeks of sales in that period, and obviously, a significant ramp up as we went into the summer. But we did see a 4% increase across our retail revenue year-over-year with average basket size improving by 9%, which is pretty significant accomplishment. Our online sales, which have benefited greatly through pandemic, but prior to that, we're up 23% on a year-over-year basis. That was driven partially by our wine club, which we saw revenue growth of 37% as well as addition of several new large tour bus operators, which, unfortunately, they're -- that were not coming to fruition this year because of the downturn in terms of tourism and just [indiscernible] tours, but we do have those in place as we emerge from the pandemic. I want you to turn your attention just now quickly to BC -- with Backyard, our BC brand and winery are doing exceptionally well. We have a new partner of choice relationship with Save-On-Foods in 27 other locations. We are their preferred supplier and list the entire Backyard Vineyards portfolio in those stores. We also saw significant increases year-over-year on our on-site and bottle sales of 23% of red and 20% on white, which is the market that's only growing 2%, 3% presumably. When you look through kind of the blackboard on Backyard Vineyard's -- in terms of our sales, we saw an increase in our total retail revenue of about 256%, which is absolutely phenomenal. And our wine club is up over 700%. We did enjoy the delivery or did start the delivery of -- direct delivery SKUs, and we've achieved a number of new listings across the retail front. And we've made investments in upgrading our on-site experience, which has been very important as we're going through the pandemic. Diamond, as for the Backyard Vineyards, is one of the closest wineries to the major urban market of Vancouver, so it benefited from customers and if we want to become -- those consumers want the companies that are close by. In terms of trajectory, we had, as I mentioned earlier in the highlights, we had a major vote of confidence from the Deutsch Family Wine & Spirits, Josh and Redemption. And that contract has been extended for another 3 years, which is significant in that we've more than doubled the business over the last 18 months and continue to see significant success with the brand going forward. We also had a major new business win with the Heineken international brands. You can see them there on the slide, Red Stripe, Gosser, Kaiser, Dragon Stout and Tiger. And we are enjoying a good relationship with Heineken and very strong performance as we go through it. And it's obviously a major [indiscernible] that they chose us over our competitors. Turning your attention to on-premise partnerships. As I mentioned, we had started to grow leading into the fiscal year for fiscal 2020 and into '21, a significant number of new regional and national on-premise customers. They include The Keg, Jack Astor's, MOXIE's, St. Louis Bar & Grill and Pickle Barrel from last year. We have added more recently, Boston Pizza, a large national chain, [indiscernible], large regional competitor as well as some smaller regional people such as TinCup and Silver Birch. We've also seen growth in our retirement residents business with exclusive arrangements with Chartwell and Sienna here in Ontario, and those are pretty significant in terms of business opportunity for us. Turning your attention just to the export market. As you know, export has been a very tough slide over the last 2.5 years. If you recall, back in 2018, our business was down with our largest distributor in China, largely because of an over inventory position with that supplier largely due to slower opening of retail outlets in the Chinese market. We had anticipated that oversupply over inventory position would begin to wane through calendar 2019, fiscal 2020. And unfortunately, we were hit with the Huawei executive and the declining diplomatic relationship between Canada and China, which impacted quite significant the large distributors. And now, of course, we're struggling -- China is now struggling with pandemic. The pandemic hit, for those of you who may recall, hit China around the Christmas period, the holiday season last year. And result of it, the Chinese government moved very aggressively and actively canceling most of the festivities surrounding Chinese New Year, which is the largest period of consumption for wines and getting the wines in the Chinese calendar. And that, obviously, had significant impacts globally. Most of our international competitors have seen kind of significant declines in the business. Have we -- however, on the positive side, we have continued to open new markets, and we have been aggressive in both the European and South America and Southeast Asian markets. We've opened up Finland, Denmark and Sweden and had good relationships with the distributors in these countries and had, for those markets, relatively significant orders. We've also opened up the distributor in South America as well as Thailand and they will start to bear fruit in the future. And we continue to focus on all the major export markets and continue to look for opportunities within the Asian market through either Hong Kong or through China and through other, obviously, countries such Vietnam and [indiscernible]. Our focus remains on our branded Icewine and reserve wines. Those are the areas that are most interest to distributors in those countries. And the Canadian product and our product is exceptional and is obviously in demand as we start to open up new markets. And so hopefully, we'll have good news coming in the near future in a number of those fronts. Major -- sorry, I skipped a slide here. Sorry. Award-winning -- we had another award-winning year from the standpoint of our production. We saw a -- 27 awards for our wine. Our wine makers have been doing a great job of producing a superior product, and it's recognized by the fact that out of the 27 awards we received this year, major awards, we received. 11 of them or 40% are gold. And in fact, a couple of them were double golds and reviews such as the Decanter, International Wine Challenge and the China Wine & Spirit Awards. So it's very significant, although it doesn't really move the needle with the consumer as much. It does demonstrate to both the industry and to our own employees that we have the superior quality in terms of our production line and our ability to produce a very good high-quality line. Another area of expansion growth has been our extra provincial market. We've seen -- extra provincial, for those we don't know, is where we ship our domestic production into other jurisdictions other than the products in production. So in Ontario DC that will be shipping our goods in predominantly the Western Canada, BC AB and SASK, but also in the East Coast. We've seen an increase of about 67% over the prior year with the vast majority of the increase coming out of BC Alberta, Saskatchewan. And for those of you who are on the website, you'll see 2 labels there for the Red River Rouge and the Red River Blanc, which were special brands that we developed for the Manitoba Liquor Commission -- Liquor Board to celebrate Manitoba's 150 years in confederation. And the white was actually supplied from Columbia by Backyard. And the red was supplied by Niagara -- by the Diamond Estates winery in Niagara. So very significant opportunity for us. We also have, as you see in the slide, that 20 Bees, you've seen that, that goes west in BC. So that's quite significant. I would be remiss if I didn't talk about some of the impacts that we're seeing in the pandemic that is waving or washing over the country. Second wave is now hitting us. There's really kind of 5 key areas that are affecting us. First and foremost, obviously, the significant impacts of own consumption predominantly primarily in bars and restaurants. Our domestic business in Ontario has a very well-developed out-of-home or on-premise business as you saw from some of the slides earlier. And it has impacted that business as we have gone through kind of the first quarter and into the second. Although we are seeing some positive results with the opening of patios and some indoor dining although at a lower density level. But it hasn't [indiscernible] business quite significantly as well as our own tourism business kind of wines. So we've seen significant reduction in both local tours, whether it be on Vancouver or new Backyard or in Ontario, in Niagara, in Toronto, but also domestic international tourism. There's no flights coming in from Europe or the Far East at this time, and that was a significant portion of our business to [indiscernible] Backyard Vineyards. We've also seen a shift in terms of the consumers' consumption. This has been the -- quite extensively in the press where people -- it's a bit of a dichotomy in that they are transitioning to lower-priced value brands and the domestic market that tends to be boxlined. And then the international, the wine $100 million. And also, they're transitioning -- the consumers are transitioning to brands that they recognize. These are traditional brands. So we've seen brands like Josh and [indiscernible] who benefit from the recognition amongst the consumer and the relationship that the consumers have within these trusted brands. They won't have to worry about as this pandemic consume the economy. One of the impacts, which has been very positive, and it's actually to our benefit, has been the significant growth in our Ontario grocery. Grocery growth relative to LCBO in Ontario is outpacing -- the grocery is outpacing LCBO by about 25x where the LCBO would be increasing 2% or 3% of their total sales. We're seeing growth rate increasing in the 80%, 90%, in fact, in some cases, over 200% period-over-period -- that demonstrates that consumer is -- wants convenience when they shop, that they want to be able to stop at one spot rather going to multiple stores to get beer, to get wine and get their groceries. So that is obviously support for the government's intention in Ontario to move to beer and wine and broader distribution of the grocery stores, which has been put on hold over the last couple of months because of the pandemic. And finally, obviously, global markets have been impacted, particularly exports, whether it be exports actually into our country or exports from Canada into other markets due to the shift in consumption and purchasing behaviors. The supply chain has been significantly disrupted as has the consumers' consumption, not similar in like 0.3 above, which was the shift to more priced brands and recognized brand. So we are seeing those impacts across the global markets as well. So while the pandemic has not run its course yet, we are starting to see some opportunities. Obviously, within our market, online is a significant opportunity, a direct-to-home delivery as well as, as mentioned just a moment ago, grocery as big key areas for us to continue to focus on. So in summary, we see our business base as being strong, that we can sustain the momentum through the pandemic. We have a breadth of offerings. We have a depth in terms of inventory, and we have strong brands. We anticipate that we will be able to weather the storm. We have, as part of this shift, we have gone to a leaner structure. We've flattened the organization and have reduced, as I said earlier, significantly, our SG&A. And that allows us the flexibility that as we come out of the -- go into the post pandemic, [indiscernible] what the new normal looks like that we will have the dry powder to be able to act on opportunities as they emerge. We're also continuing to focus on our grocery channels in Western Canada, making investments in those markets to make sure that we are on the leading edge of growth that we are seeing opportunities capitalized on as they present themselves. And as well, we are maintaining our brand focus, looking for new opportunities domestically and internationally. And there are some things that we'll be talking about on our fourth quarter -- or sorry, second quarter earnings announcement later in November, which we will provide to everybody. Overall, I think we are very well-positioned for a strong performance in the future and as the pandemic starts to wane, hopefully, in the next 6 to 12 months. I want to thank you all for your attention. Thank you for your continued confidence and for your support. And I'll now take everybody off mute and hopefully be able to answer any questions you may have. Thank you. Sorry. So everybody is unmuted now. So if there are any questions, please introduce yourself and ask a questions. Okay. Well, with that, I see there are no questions. Thank you, everyone, for your support.

What's the stock split? How much -- like I heard there's either 10, 20:1? Or what is exactly the amount that people are thinking about?

Okay. So who is this?

John [indiscernible] Burlington.

Okay, John. Yes. So we have -- the resolution is that we can split the stock up to 10:1. We had originally planned last year to do that, but obviously, the circumstances in the marketplace changed quite dramatically, and we've reiterated that. And as we wanted to have that option as we go forward. It may not be a 10:1. It may be an 8:1. It may be a 6:1. We haven't made that determination at this point.

Okay. Good. And can you -- do you want to comment on yesterday's news release?

With regards to the BCAP?

That's right. The loan.

Yes, certainly. So we thought the opportunity -- we used the BCAP loan as an opportunity to add some working capital into the organization. As you know, this pandemic is -- things are changing on a regular basis. And as we emerge from it, we want to have the flexibility to be able to capitalize on opportunities as they present themselves. Part of that, of course, is inventory. We want to make sure that we have -- particularly in our domestic business, we only get one chance at actually adding inventory on an annual basis. We want to make sure that once the harvest is here, that we were in a sufficiently strong position with inventory that -- should grocery open up or any of the other opportunities to export, that we have sufficient inventory to be able to supply those markets. So the BCAP loan gives us those flexibility.

Okay. What about the crop this year? Nobody commented on it and...

Well, yes, we can't -- we're still harvesting, but the -- it's actually -- I'd probably say words that my winemaker might [ laugh ] me about. The -- it has been an exceptional year for the quality of the berries. So they've been smaller. They've been -- the sugars have been very high. The colors have exceptional -- it will be a vintage year, but the tons per acre, the actual amount coming in has been less because the berries are smaller. So we're getting actually Brix, which is soluble sugars in the grapes They are approaching those in Napa. So it's a good year as to buy wine and put it down on your shelf.

We're going to buy anything from Chile this year or anywhere else?

I do not plan on buying anything from Chile. Any other questions? Okay. Well, with that, I want to thank everyone, and we will conclude the call. Thank you, everybody.

Thank you, everybody.